Motorola's 2003 Terminals Need More Than Brand and Color

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1 Event Summary Motorola's 2003 Terminals Need More Than Brand and Color Abstract: Many terminals announced at HelloMoto 2003 will not ship until 2H03. This delay, combined with fierce competition, will hinder Motorola's market share aims despite its operator relationships and well-funded Moto brand. By Ben Wood, Nick Ingelbrecht and Sauk-Hun Song Strategic Business Imperatives To remain competitive, mobile-terminal manufacturers must: Maintain their sales momentum by regularly introducing new designs and functions. Exploit economies of scale. Support a wide range of radio technologies in their terminals. Develop strong relationships with mobile operators. Maintain a strong brand. Publication Date: 14 January 2003

2 2 Motorola's 2003 Terminals Need More Than Brand and Color Event Summary: HelloMoto 2003 Motorola unveiled its initial range of mobile terminals for 2003 at its HelloMoto event in Shanghai, China, on 8-9 January It announced eight new products that, together, bring its "Moto" brand to all levels of the market. That the event was held in Shanghai underlines the strategic importance Motorola places on the Chinese market for mobile terminals. Motorola has the largest share of this market, which it believes has considerable growth potential for both code division multiple access (CDMA) and Global System for Mobile Communications (GSM) technologies. Motorola also used the event to hold its latest developers' conference on mobile Java (specifically, Java 2, Micro Edition [J2ME]). It showed commitment to J2ME as its preferred development environment and way of delivering mobile-data content and applications. This follows Motorola's recent agreement to work with China Mobile to foster development of mobile Java products. Motorola's Worldwide Range for 2003 Has Color Displays Throughout Motorola's new mobile terminals all have color screens. The range also includes models that support advanced features such as integrated cameras, mobile Java and the Multimedia Messaging Service (MMS). It closely matches that of the product road map which leaked to the Internet in September 2002 (despite Motorola's earlier assertion that it contained inaccurate information); only its Symbian-based smart phone, V300 and V70i terminals remain unannounced. Gartner expects the Symbian and V300 terminals to launch in 2003, but understands that the color V70i has been postponed until All of the GSM models support the general packet radio service (GPRS). But only two, the V600 and A835 an updated version of Motorola's third-generation (3G) A830 support Bluetooth. Motorola thinks Bluetooth will not be wholly viable until 2004, when additional interoperability and security profiles become standardized. Motorola's future accessory strategy will, however, be based on Bluetooth; it will focus initially on device synchronization and in-car hands-free equipment. For the low-end market, Motorola announced the C350 a color version of the C330. The C350 is scheduled to launch in the first half of 2003, when it will compete directly against Nokia's 3510i. It will face significant price pressure in this highly competitive segment, particularly as it lacks support for MMS and mobile Java. Its price will also largely determine whether mobile operators accept it. Motorola points to an unsubsidized price of less than $150 (which Gartner believes needs to fall to nearer $100). Motorola also indicated that it plans to launch a very low-cost entry-level product to win share in emerging markets such as Africa as Nokia did with its 2100 terminal. A key product for China is the A388c, a color version of the A388 pen-based smart phone. The A388c, which is due out in the first half of 2003, has a 65,000-color thin film transistor (TFT) screen, supports mobile Java and MMS, and runs on a 66MHz DragonBall processor. This type of product has been unsuccessful outside Asia/Pacific, but the A388c remains an important product for Motorola, largely because it supports scripted languages through its touch-sensitive screen.

3 Gartner Dataquest Perspective Motorola's flagship product for 2003 is the V600, which is due to launch in the second half of the year. It is a quad-band terminal, supporting the 850MHz, 900MHz, 1800MHz and 1900MHz GSM bands. Its clamshell design has a 65,000- color display (176 x 220 pixels), Bluetooth support and a built-in VGA video camera. As a result, Motorola is positioning it as an "aspirational" product to enhance the perception of its brand. The introduction of quad-band terminals (more being promised later in 2003) echoes Motorola's prior attempts to lead by providing multiband devices although the importance of quad-band support to buyers has yet to be determined. Perhaps the most important products for Motorola's positioning in 2003, however, were not announced at the event, apparently because final patent approval was not forthcoming in time. Motorola will announce more midrange products later in the first quarter to fill the gap between the C350 and the V600. Only then will it be possible to assess whether Motorola has a high-volume, low-cost GSM terminal that will attract brand switchers in Asia/Pacific and in Europe, the Middle East and Africa (EMEA). For more information on the products announced at Motorola's HelloMoto event (including the E365, E380 and V295, which are not discussed in this document), consult Gartner believes Motorola's new range of terminals is built on four basic platforms, which it can customize to meet the needs of different regions and mobile operators. This approach should give it economies of scale, faster time to market, and reduce the time taken to introduce new terminals to between three and five months. It may also, in time, bring increased sales. All the leading manufacturers are, we believe, using such platform-based strategies for highly competitive, fashion-driven markets where replacement purchases are particularly important. Motorola's new range builds on its existing products, such as the midrange T720 and the entry-level C330 (which will still be sold). It is adding, at minimum, 4,096- color displays throughout the range and focusing on "best of breed" display technology. Gartner believes color will be a central theme for all leading manufacturers in They will use it to target potentially lucrative replacement markets and aspirational buyers in developing markets. Motorola used the event to drive home its Moto brand message of matching technology with users' lifestyles. For the operators attending, though, it was characterized by a business-oriented focus on features to enhance their average revenue per unit (ARPU) and on application enablers such as mobile Java and "haptics" a technique of using vibration and light to add unique characteristics to terminals. This work with operators comes as no surprise, being the result of a strategic direction announced in July Motorola anticipated the need for "meganetworks" such as that run by Vodafone, which wants to exploit its brand name through programs like Vodafone live! (see "Vodafone Live! Signals New Strategy for Consumer Services," TELC-WW-DA-0130). Gartner expects Motorola's V600 terminal to be among the Vodafone live! product range in the second half of 2003, along with another, as yet unannounced, model. Motorola hopes to strengthen its operator relationships with this new range of terminals, and to offer them personalized variants of each. Gartner believes Motorola will be happy for its brand name to coexist with those of operators on 3

4 4 Motorola's 2003 Terminals Need More Than Brand and Color these terminals, with equal prominence. This is something Nokia has so far been reluctant to entertain. Motorola will probably also hope to exploit operators' concerns about Nokia's dominance. Worldwide Perspective Motorola faces stiff competition in 2003 and not just from Nokia, the world's leading manufacturer of mobile terminals. Nokia increased its lead in 2002, but Motorola also faces mounting pressure from Samsung, which plans to enter the highly competitive entry-level, $100-to-$150 segment this year. If Motorola's profits are to continue to grow, it will have to cut costs ruthlessly in this segment. Gartner believes that, as a result, Motorola's main strategic focus for 2003 will be on staying the world's second-largest manufacturer of mobile terminals, not on winning its desired share of more than a fifth of the market or on usurping Nokia. The latter offensive will have to come later. This approach is reflected in the largely evolutionary nature of the products announced at the event. Regional Perspective EMEA Motorola, which holds strong positions in China and North America, will be hoping its new terminals can revive its fortunes in EMEA. Motorola struggled there throughout 2002 because of product and technology delays, particularly for color displays and MMS support. Motorola's key objectives in EMEA for 2003 are to take second place from Siemens, focusing on Eastern Europe and Russia. To do so, Motorola will have to offer extremely aggressive prices, because this approach is, Gartner believes, a key reason for Siemens' strong EMEA sales. Even then, seizing second place will be hard, given Nokia's strong product range announced in November 2002 (see "Nokia Announces More Devices and Enters Games Industry," TELC-WW-DA-0134) and growing competition from Samsung, Siemens and, potentially, Sony Ericsson. For Motorola to maintain its market share in Western Europe, it must win acceptance to the Vodafone live! product lineup. Motorola seems confident of having at least one terminal in this lineup. However, Gartner believes acceptance may be delayed until the second half of 2003 because Motorola's terminals do not support Vodafone's dedicated class library for mobile Java applications. Asia/Pacific Motorola's stated aims for Asia/Pacific's mobile-terminal markets in 2003 are to defend its lead in China; to improve its market share in India and Southeast Asia (which Nokia largely dominates); and to increase its market share and brand awareness in South Korea's CDMA market, where Samsung has a clear lead. Motorola is revising its distribution strategy for China to stem the loss of market share to local brands and challengers such as Samsung. Gartner believes such pressure will be a central concern to Motorola and to all non-chinese terminal manufacturers throughout 2003 and beyond. At present, far more models of terminal an estimated 457 are on sale in China than in any other country. This, combined with the release of new licenses for terminal manufacturers and the aggressive entry-level strategies of companies such as Samsung and TCL Mobile Communication, is making the Chinese market more competitive than ever.

5 5 Motorola will also use its simplified terminal-platform strategy to work with original design manufacturers such as Quanta and BenQ in Taiwan to swiftly bring new variations of existing models to the Asia/Pacific market. This will enable Motorola to better exploit its short product development cycles and the even shorter-lived local taste in terminal design. Motorola's profits in the particularly price-sensitive markets of China and India and those of its competitors are likely to face pressure from operators' increasingly urgent calls for sub-$100 cdma2000 1x terminals. These require Qualcomm to make suitable chipsets available, which it may later in To strengthen its position in South Korea, Motorola introduced the 610 terminal at the end of This CDMA device has a 260,000-color display and 40-note polyphonic sound. Motorola will introduce an enhanced version the 620 with built-in camera in the second quarter of North America and Latin America Motorola is bullish about its performance in the fourth quarter of 2002 in North America and Latin America. Moreover, its objective for 2003 is to again be the leading vendor there. Gartner believes that, during 2003, Motorola is more likely to gain share in the Americas from continued success with its 2002 models than from any it introduces in The V60, V120 and T720 were among the top five best-selling models in North America at the end of 2002, and still have potential. Indeed, two or three of them could well emulate the long-lived, high-volume success of Nokia's 5100 and 3300, because more operators are choosing to offer some combination of them. If they do have a comparable market life, they will help Motorola cement lucrative carrier relationships at a time when the transitions from time division multiple access (TDMA) to GSM and from CDMA to cdma2000 1x are under way in earnest. If so, not only will Motorola surpass Nokia first in North America and then in Latin America but it will do so by a long way. Motorola's most interesting announcement for North America was that it will introduce the Enhanced Data Rates for Global Evolution (EDGE)-compatible T725 terminal in the second half of Gartner believes Motorola's decision to offer an EDGE terminal there is largely due to contractual obligations with mobile operators Cingular Wireless and AT&T Wireless. Motorola did not announce an EDGE terminal for Asia/Pacific or EMEA. This accords with Gartner's view that EDGE will not be rolled out in EMEA or Asia/Pacific in the short term. However, should operators require EDGE terminals in these regions, Motorola will be well positioned to provide them. Smart Phone Strategy Rumors of Motorola's A760, a Linux-based smart phone developed mainly for the Chinese market, circulated at the event. Motorola did not formally announce this potentially significant product, but did (reluctantly) discuss it. Gartner believes Motorola's Linux smart-phone strategy for China is a response to the Chinese government's support for this operating system (OS). In Europe, Motorola will continue to support the Symbian OS. It said it would launch a Symbian-based smart phone in When asked whether it would license Nokia Software's Symbian-based Series 60 user interface (UI), Motorola replied that it was evaluating it but had significant reservations about the Series 60's "openness from a standards perspective." Gartner believes the decision whether to adopt this

6 6 Motorola's 2003 Terminals Need More Than Brand and Color UI is an important decision that Motorola has to make. This is because the Series 60 UI is fast emerging as the de facto UI for smart phones in Western Europe, where at least three operators are adapting their mobile portals to support it. Another major strategic decision Motorola must make is whether to take a regionally distinct approach to smart phone OSs, with Symbian in EMEA, Linux in Asia/Pacific and, potentially, Microsoft's Smartphone 2002 in North America. Support for 3G Motorola reiterated its belief that its future success will stem from its early commitment to delivering 3G terminals and, particularly, from its relationship with operator Hutchison 3G. The A835 terminal, which will be available in the second half of 2003, makes a somewhat uninspiring (though understandable) contribution to 3G's progress. It derives from Hutchison 3G's first 3G terminal, the A830, which is already shipping. To the A830's features, it adds two cameras (front and rear facing) for two-way videoconferencing. It is hard to see how either product will attract users in Hutchison 3G's launch markets of Italy and the United Kingdom. This is because they compare unfavorably with second-generation GSM products that are already available there. Therefore, Motorola will have to rely heavily on the marketing skills of Hutchison 3G, when it launches 3G services under its "3" brand. Despite these reservations, Gartner accepts that Motorola's 3G products give it a significant lead in expertise and credibility in the market for 3G terminals. Gartner expects Motorola to continue to lead the development of 3G terminals in 2004, by which time it will offer terminals that are more suited to customers' expectations. Conclusion At its HelloMoto event in January 2003, Motorola showed that it has strengthened its range of mobile terminals by replacing products that three years ago contributed to a significant loss of market share. The challenge for Motorola in 2003 is to use its new terminals to maintain its market share in China, to revive its share in EMEA and to increase its share in the Americas. This will be hard for two main reasons: firstly, many of its key products will not be available until the second half of 2003; secondly, Motorola will face intense competition in every region from many manufacturers, notably Samsung. Gartner believes Motorola's new Moto brand will help it in some of these markets, particularly as it will spend more than $300 million on the brand in But brand alone will not be enough. Motorola must also ensure that competitors' products do not overshadow its efforts in One way in which it can do so is to ensure timely delivery of its products, something it struggled to do in Key Issue Who are the key players in the mobile-terminal market, and how are they differentiating themselves?

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